Interesting article here in the FT Blog about how the Private Sector must be under reporting their Surplus.
The blog post makes a hash of it, but the UBs economist George Magnus seems to know the Balance sheet stuff cold, even if he won’t let on that he knows other ways to think about our favorite equation, I = S + (G-T) + (N-X). He even drops serious and repeated Minsky references – how can he not know his Randall Wray and Billy Mitchell?
Magnus points out that the private sector “must” be underreporting its savings, because they don’t add up with other known numbers:
“The data, through Q3:2010, reveal that the surge in the government deficit to 10% GDP is basically the counterpart of the continuing surplus earned by foreigners (in effect, the current account position), and the sharp turnaround from deficit to surplus in the household and non-financial corporate sectors. Put another way, private sector deleveraging has been accommodated without traumatic damage to the economy by the government’s willingness to borrow (temporarily) on its behalf.
This much is self-evident to people familiar with the balance sheet approach to booms and busts. But now it gets a bit more interesting, because the Fed’s data don’t add up properly any more. Chart 1 shows that the private sector surplus last year was running at about 5% of GDP. If we use commercial bank data to estimate the net financial investment of the sector, the private sector surplus would be about 3.5% GDP. Now go figure. Even adding in the overseas surplus, how does this square with government borrowing of 10% of GDP?
The answer is that there appears to chronic under-reporting of the private sector surplus. So, look at Chart 2, where the solid line is the private sector financial balance as reported in the Flow of Funds, but the dashed line is the private sector as a residual, calculated as the government plus the overseas balance. Mostly, these two series are in the same ballpark – until the financial crisis. To make the flow of funds data balance as they should, the private sector surplus ‘needs’ to be a lot closer to 8.5% of GDP, which is 3.5% GDP larger than officially stated, and 5% GDP larger allowing for the inclusion of financial institutions.”
This is serious stuff – what is going on? I don’t have any good ideas yet. MMTer’s out there – any ideas?
Do not take these numbers as gospel, but they are just one more way to look at what is going on in the world. With the Australian Dollar above the Pre-Crisis highs, the high exchange rate will place some dis-inflationary pressures on the prices in that country. Since Australia has run a balanced budget for a long time now, their domestic supply of currency isn’t putting much pressure on prices.
China allowing the Yuan to appreciate should push inflation pressures out to other countries. But while that is happening for the U.S., it doesn’t seem to work like that for Australia. Due to the natural resource based trade between China and Australia, Australia is linked with economic activity in China in a very direct manner. Any reduction in Chinese inflation – or even just a lower growth rate in inflation – will have similar and outsized impact on Australia. Lower inflation in China reduces inflation in Australia too.
For the U.S., the relationship with China and inflation is likely to be a see-saw style relationship. Lower inflation in China probably means higher inflation here. Higher inflation in China means lower inflation here. Just to be clear, the amount of inflation that China is absorbing for the U.S. is probably very low.
I included France in the chart to show the insanity of Axel Weber.
Out of the comments, Tom H had a gem:
Waren has pointed out that Art Laffer understands monetary ops perfectly. His whole game is cutting taxes, cutting spending on social programs, and increasing corporate subsidies. This is the source of Cheney’s famous, “Deficits don’t matter.”
The problem is that “they” do get it and have been using it to advantage. Laffer’s current disciple is GOP “budget whiz” Rep. Paul Ryan. But now the fiscally conservative GOP wing is objecting to what Poppy Bush called “voodoo economics.” So we’ll have to see how this shakes out on the GOP side. So far the Lafferites are winning, with tax cuts blowing out the deficit, which is good from the MMT vantage at this point in time, with huge leakage from demand due to increased saving/delevering and an outsized CAD.
I confess, I knew that Laffer knew monetary operations, and how it all worked. I just didn’t put together that someone could use the ideas of MMT in evil ways. Doh! How did I not see this?!?
If Art Laffer really gets and believes MMT, then he must be a pretty heartless guy. As far as I can tell, he does not now and has never advocated a payroll tax reduction, even though those are the people that could boost demand the most. And he even goes out of his way to misrepresent the amount of taxes working people pay.
Let’s take a look at the bottom 75% of taxpayers over this same time period — the group current Democrats refer to as middle- and lower-income earners. From 1981 through 2005, the share of all income taxes paid by the bottom 75% of all income earners (as reported on the individual income tax returns) declined to 14.01% from 27.71%. As a share of GDP, total taxes paid by the bottom 75% fell to 1.05% from 2.50%. The bottom 75% of all taxpayers today pay less than 35% of all the taxes paid by the top 1% of all income earners.
Over the last 25 years, the bottom 75% of all taxpayers’ tax payments fell and their tax rates fell. This is the group the Democrats are targeting for tax cuts.
Where is any mention of Social Security taxes? If he knows MMT – which according to Warren he does – then he cannot be ignorant of the impact on the lower classes of these taxes. Also, he must then realize that the greatest corporate tax break possible would be to reduce the employer side of Social Security taxes. But he doesn’t talk about this – even though it would be the most logical and large tax reduction we could have.
I bring this up because all he really talks about is reducing taxes. So why not aim at the biggest tax pie out there?
His life goals must involve some form of bringing back poor houses and trying to undermine the government.
Interesting news out of Iraq. At least 10 cities are seeing massive protests.
BAGHDAD — Demonstrations turned violent across Iraq on Friday, as protesters burned buildings and security forces fired on the crowds. At least 10 people have been killed, including at least two in Mosul and another in Ramadi.
I thought we already liberated that country.
“Right now, there are active talks in order to implement what is needed,” the Saudi oil official added. He stressed that the kingdom retained spare capacity of some 4m barrels a day – more than than double Libya’s entire output which totalled 1.58m b/d in January, according to the International Energy Agency.” [Italics mine]
Wow. “Stressed” – usually people aren’t lying when they stress they can do it right away. It almost sounds like he is begging people to take more crude oil. The 4m barrels is far beyond the estimates of spare capacity that I’ve seen.
And that isn’t all:
“Traders believe Saudi Arabia has the capacity to boost production by at least 1m b/d with just 24 hours notice, meaning that if a decision was adopted now, the oil tankers could be arriving in Europe within 10 days.”
Wow. Just wow. 24 hours notice.
Also, why isn’t Iraq just pumping out the oil right now? A few trillion, and this is what we get? No oil extra oil during an oil crisis?
With Oil spiking, and Libia blowing up pipelines, is stagflation for the U.S. the inevetible next step? No, but it is very, very possible. In the world of theories about what might happen over the next year, Stagflation is a decent one.
One of the causes of Stagflation is the relationship between Lebig’s Law and oil. When we have a supply shock in that limiting resource, there is a potential for Stagflation. There usually isn’t any good way to substitute out of oil – that is why it is limiting. So a shock in supply for this oil causes a spike in the price of oil relative to other prices. This single good must by definition get much more expensive relative to other goods.
Many people think of this as a tax. I do too – I published the math in another forum in July of last year, and have a detailed model on how much oil prices impact the economy. I agree with DB on the magnitude of the impact of price changes in oil.
Oil is special in that it causes price increases in a host of related products. Nearly everything has transportation costs. Because most of the basic stuff that we buy has significant transportation costs, thats where the ‘flation’ part of stagflation comes in.
But the Stag part comes in from the parts of the economy that are facing price cuts, but the goods cannot be made for that cost. I wrote about a very similar idea in a post a while back:
But in the $100 total world, if the car gets more valuable, then everything else gets less valuable. Should my food be worth less because my car is worth more? But what if that other good cannot be produced at for profit at $30? Then, the world stays the same and no innovation happens. We do not get a better car.
The case of stagflation is very similar to this example. When oil goes up in value, there is simply less money to be paid for other goods and services. However, some of these goods cannot be made in a profitable manner at the new, lower price level.
So what happens? Some people get laid off and dont’ get their jobs back. Other products can be made from cheaper stuff and sold at the same price. Many goods go up in price to cover the embedded cost of oil. There is lots of uncertainty about future economic prospects, so few businesses expand.
Welcome to Stagflation! All of this because of a supply shock in limiting good, oil.
Oops! Just realized I didn’t give my reasons for not liking the Stagflation scenario. Guess what – they don’t matter! Stagflation in the U.S. and Europe is a reasonable possibility, and you should prepare a trading scenario for Stagflation. I am!
If you’ve ever played the game StarCraft, you’ll be very aware of the practical implementation of Lebig’s Law. The game is resource and economic management. You need to mine 2 different types of minerals to be able to build your forces. To construct these forces takes time, and they can only be built at specific buildings that can be constraints. Your forces are then up against other forces that have different strengths and weaknesses. It’s managing a mini economy in real time! Fun stuff.
I pulled out my Crystal Ball, and behold! There is going to be large purchases of Treasuries in the next few days. And the days after that, too. Beware the ides of March!
I don’t know why more people aren’t getting on the bandwagon yet. It would make more sense to ride the wave up and sell more into the end. Maybe they think there is another $1.3T bond fund who is going to sell their Treasuries. Maybe China? No? It must be Japan then – thats’s it. That’s who will sell $400bn of Treasuries. Japan.